ARIZONA SUPREME COURT

KARL and FABIANA STAUFFER, Plaintiffs/Appellees, v. US BANK NATIONAL ASSOCIATION, a national banking association, as Trustee for CSMC Mortgage-Backed Pass-Through Certificates, Series 2006-3, Defendants/Appellants.

CV-13-____-PR No. 1 CA-CV 12-0073 1 CA-CV 12-0132 (Consolidated)

Maricopa County Superior Court No. CV 2011-005567

PETITION FOR REVIEW

Barbara J. Dawson (012104) bdawson@swlaw.com Gregory J. Marshall (019886) gmarshall@swlaw.com Andrew M. Jacobs (021146) ajacobs@swlaw.com SNELL & WILMER L.L.P. One Arizona Center Phoenix, AZ 85004-2202 (602) 382-6000 Attorneys for Defendants/Appellants US Bank National Association

TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................... ii ISSUES PRESENTED FOR REVIEW ..................................................................... 1 WHY THIS PETITION MERITS REVIEW ............................................................. 1 FACTS MATERIAL TO ISSUES FOR REVIEW ................................................... 6 ARGUMENT ............................................................................................................. 7 I. A.R.S 33-420 DOES NOT APPLY TO NOTICES OF SUBSTITUTION, OF ASSIGNMENT, OR OF TRUSTEES SALES .................................................................................................... 7 A. A.R.S 33-420 APPLIES ONLY TO DOCUMENTS THAT CREATE FALSE CLAIMS AGAINST ONES OWN PROPERTY, AND THE NOTICES, WHICH ARE NOT LIENS, DONT DO THAT ........................................................ 7 EVEN IF A.R.S 33-420 APPLIES MORE BROADLY, IT APPLIES ONLY TO DOCUMENTS CREATING NEW CLOUDS UPON TITLE........................................................... 11

B.

II.

THE APPELLEES LACK STANDING TO SUE UNDER A.R.S. 33-420 FOR ERRORS IN THE NOTICES ......................................... 13

CONCLUSION ........................................................................................................ 16 CERTIFICATE OF COMPLIANCE ....................................................................... 17

TABLE OF AUTHORITIES FEDERAL CASES McNally v. United States, 483 U.S. 350, 359 (1987)......................................................................................9 Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979)....................................................................................10 STATE CASES Adams v. Bolin, 77 Ariz. 316, 320, 271 P.2d 472, 474 (1954) .......................................................7 Andreola v. Arizona Bank, 26 Ariz. App. 556, 559, 550 P.2d 110, 113 (1976) ..............................................3 Brandt v. Scribner, 13 Ariz. 169, 175, 108 P. 491, 493 (1910) .........................................................11 Hayes v. Contl Ins. Co., 178 Ariz. 264, 268, 872 P.2d 668, 672 (1994) .....................................................7 Hogan v. Wash. Mut. Bank, N.A., 230 Ariz. 584, 587, 277 P.3d 781, 784 (2012) ........................................... passim Richey v. W. Pac. Dev. Corp., 140 Ariz. 597, 684 P.2d 169 (App. 1984) ..................................................... 7, 11 Scottsdale Meml Health Sys., Inc. v. Clark, 157 Ariz. 461, 467, 759 P.2d 607, 613 (1988) .....................................................9 Sears v. Hull, 192 Ariz. 65, 69, 961 P.2d 1013, 1017 (1998) ...................................................13 Sitton v. Deutsche Bank Natl Trust Co., No. 1 CA-CV 12-0557, 2013 WL 4766283, *6-*7 (Ariz. App. Sept. 5, 2013)...................................................................................14 ii

State v. Mabery Ranch, Co., L.L.C., 216 Ariz. 233, 236-37, 165 P.3d 211, 214-15 (App. 2007)................................12 Strawberry Water Co. v. Paulsen, 220 Ariz. 401, 406, 207 P.3d 654, 659 (App. 2008) ..........................................13 Wyatt v. Wehmueller, 167 Ariz. 281, 286, 806 P.2d 870, 875 (1991) .................................................4, 8 STATE STATUTES A.R.S. 33-420................................................................................................ passim A.R.S. 33-705..........................................................................................................9 A.R.S. 33-804........................................................................................................11 A.R.S. 33-808........................................................................................................12 A.R.S. 33-817........................................................................................................12 A.R.S. 33-818........................................................................................................12 OTHER AUTHORITIES Arizona Legislative Council, Summary Analysis of H.B. 2458, Conveyances: Recording Liens (Mar. 12, 1981) ..................................................4 State of Arizona, 35th Legislature, Chapter 259, H.B. 2458 (Apr. 28, 1981) ..............................................................4 State of Arizona, 35th Legislature, Minutes of the Meeting, Committee on Commerce and Labor, H.B. 2458 (Apr. 8, 1981) ........................................................................................................4 State of Arizona, 40th Legislature, Minutes of Committee on Commerce and Labor, H.B. 2356 (Apr. 15, 1992) ....8 The Deed of Trust: Arizona's Alternative to the Real Property Mortgage, iii

15 Ariz.L.Rev. 194 (1973) ....................................................................................2

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ISSUES PRESENTED FOR REVIEW 1. Whether A.R.S. 33-420 a statute applying to documents protecting

Arizonans against liens clouding their titles should now be applied to notices of substitution, of assignment, and of trustees sales following an executed and recorded Deed of Trust, none of which are liens, and none of which cloud Plaintiffs title? 2. Whether, despite Hogan v. Washington Mutual Bank, there is a

private right of action within A.R.S. 33-420 allowing defaulting mortgagees to stop trustees sales because of alleged errors in notices of substitution, of assignment, and of trustees sales that dont cloud their title? WHY THIS PETITION MERITS REVIEW 1 This Court already decided that trustees sales under Title 33 proceed

without beneficiaries needing first to show ownership of the note their deed secures. The decision on review (the Decision) fails to follow Hogan, creating a new right supposedly emanating from Title 33. Under it, defaulting mortgagees can sue to challenge the propriety of a trustees sale solely because of alleged defects in documenting the transfer of the note. The Decision thus reinstates the show me the note defense proscribed in Hogan, and does so by finding an injury and cloud upon title where none could possibly exist for if a defaulting mortgagee has no right to hold up the trustees sale based upon show me the 1

note, then there is no injury to the same defaulting mortgagee from issues as to documentation of the transfer of the note. Yet that is the very injury and cloud upon title the Court of Appeals has found constitutes Plaintiffs standing and is the basis for its novel interpretation of A.R.S. 33-420 that contradicts Hogan. This Court should grant review, reverse the Decision, and restore Title 33s careful balance among the concerns of trustors, trustees, and beneficiaries. See Hogan, 230 Ariz. 584, 587, 277 P.3d 781, 784 (2012). 2 This Court should grant review because the Decision, which cannot be

squared with Hogan, presents an important issue of law that was decided incorrectly. Given how frequently A.R.S. 33-420 is litigated, the Decision

clearly presents a recurring issue of statewide importance. This Court should also grant review because the Decision places the Court of Appeals in conflict with every federal court that has ruled on the same issue no less than six different judges. This Court should step in and resolve the confusion the Decision creates about the basic rights of lenders and borrowers in real estate transactions. 3 This is one of many cases arising during the recent recession in which

defaulting borrowers sought to forestall a trustees sale by complaining about failures of documentation that never injured them. Here, Plaintiffs Karl and

Fabiana Stauffer (the Stauffers) sued under section 33-420 to prevent a trustees sale of property for which it is undisputed that they owed money, but had stopped 2

paying. The Stauffers only reason to hold up the sale? One common error in notices of the substitution of a trustee, of assignment of a deed of trust, and of a trustees sale (the Notices). The Superior Court dismissed the Complaint for failure to state a claim. The Court of Appeals reversed and remanded. 4 The first reason to grant this Petition is that the Court of Appeals has

interpreted section 33-420 against the expressed will of the Arizona legislature. The Court of Appeals opinion (the Decision) holds that the Notices are documents that assert an interest in, or a lien or encumbrance against real property within the meaning of section 33-420. The Decision does this without proper analysis of the statutes critical text, policy, and structure. 5 The Decision unquestionably frustrates the aims of the Arizona Deed

of Trust Act. A major purpose of the Deed of Trust Act was to provide relatively inexpensive and speedy foreclosure proceedings. Andreola v. Arizona Bank, 26 Ariz. App. 556, 559, 550 P.2d 110, 113 (1976) (citation omitted). As this Court reminded just last year, trustees sales are meant to operate quickly and efficiently, outside of the judicial process. Hogan v. Wash. Mut. Bank, N.A., 230 Ariz. 584, 587, 277 P.3d 781, 784 (2012) (citation omitted). This Court rejected the show me the note argument for enjoining a trustees sale because requiring a beneficiary to prove ownership of the note as a prerequisite to a trustee sale would . . . re-inject litigation, with its attendant cost and delay, into the process. Id. 3

Yet the Decision lets the Stauffers do precisely what this Court said in

Hogan they cant do. It empowers them to blow up the trustees sale, substituting in its place costly and time-consuming litigation here about whether Premier (the lender under the Deed of Trust) endorsed the Note to Ohio Savings Bank and thus lacked authority to substitute the trustee, authorize the notice of sale, and assign the Deed of Trust to U.S. Bank. The Stauffers thus repackaged the discredited show me the note argument so litigation could impede and delay foreclosure. 7 This is not what section 33-420 is for to protect property owners

from actions clouding title to their property. Wyatt v. Wehmueller, 167 Ariz. 281, 286, 806 P.2d 870, 875 (1991). Section 33-420 is not there to provide a

remedy for defaulting homeowners like the Stauffers. As this Court pointed out in Hogan, homeowners have other protections under Arizona law if there is some dispute about who is the proper beneficiary under a deed of trust. 230 Ariz. at 587, 277 P.3d at 784. 8 The statutes history stands foursquare behind this view. The purpose

of the statute was to help prevent nuisance suits purporting to create a so-called common law lien against the property of [public] official[s]. Arizona

Legislative Council, Summary Analysis of H.B. 2458, Conveyances: Recording Liens (Mar. 12, 1981) (emphasis added). 4 Contemporaneous minutes and the

preface to the house bill show that the laws aim was documents purporting to create liens. See State of Arizona, 35th Legislature, Minutes of the Meeting, Committee on Commerce and Labor, H.B. 2458 (Apr. 8, 1981) (describing the statute as establish[ing] liability for filing any document purporting to create a lien . . .); State of Arizona, 35th Legislature, Chapter 259, H.B. 2458 (Apr. 28, 1981) (describing the statute as establishing liability for recording or filing any documents purporting to create a lien against real property). Reviving show me the note under a patina of section 33-420 analysis, the Decision makes something of Section 33-420 that is wholly alien to its provenance. 9 This Court should also grant review because the Decision conflicts

with rulings by six different federal judges applying Arizona law. Not citable to this Court by rule, and thus not cited herein, twenty decisions by federal judges in Arizona have all found section 33-420 inapplicable to the notices at issue either because they do not create interests, liens or encumbrances, or because the plaintiffs suffered no injury and lacked standing to sue. Because of the confusion the Decision sows concerning section 33-420, and because of the implications the Decisions novel holding has for lenders and borrowers conducting business in Arizona, the Court should grant this Petition.

FACTS MATERIAL TO ISSUES FOR REVIEW 10 The Stauffers took out a loan to purchase property in Scottsdale,

Arizona (the Property). [R. at 1, 2]. This loan was secured by a Deed of Trust. [R. at 1, 2]. The Stauffers defaulted on their repayment obligations and received a Statement of Breach. [R. at 1, Ex. G]. Consequently, a Notice of Trustees Sale was recorded by the trustee at the time. [R. at 1, Ex. C]. After the notice of sale was recorded but before the trustees sale, the Deed of Trust was assigned to U.S. Bank National Association, as Trustee for CSMC Mortgage-Backed Pass-Through Certificates (US Bank). [R. at 1, Ex. E]. 11 Before the trustees sale, the Stauffers brought suit under section 33-

420, claiming that the Notices, including the notice of sale, contained false statements. [R. at 1, 11-12]. They sought an order to show cause, an injunction against the trustee sale, damages, and clear title. They claimed that the alleged defects in the Notices injured them through the pending trustees sale, and damage relating to their credit score and other debts secured by the Property. [R. at 1, 18-19]. After they sued, the sale was cancelled. [R. at 19-20, at p. 3 and Ex. 1]. 12 The Superior Court dismissed the Stauffers complaint for failure to

state a claim, holding that the Notices are not subject to section 33-420 and that the Stauffers lacked standing because the statute only allows suit for documents

creating liens, while the Stauffers were not owners or beneficial title holders under section 33-420. The Court of Appeals reversed. ARGUMENT I. A.R.S. 33-420 DOES NOT APPLY TO NOTICES OF SUBSTITUTION, OF ASSIGNMENT, OR OF TRUSTEES SALES. A. A.R.S. 33-420 Applies Only to Documents That Create False Claims Against Ones Own Property, and the Notices, Which Are Not Liens, Dont Do That. The text, policy, and structure of section 33-420 show that it only The Court of

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applies to documents that create liens and not to the Notices.

Appeals concluded without explanation that section 33-420 is unambiguous, despite earlier cases in which it has stated that the statute is not a model of clarity. See Richey v. W. Pac. Dev. Corp., 140 Ariz. 597, 602, 684 P.2d 169, 174 (App. 1984). The intent and purpose of the law control the construction of an ambiguous statute. Adams v. Bolin, 77 Ariz. 316, 320, 271 P.2d 472, 474 (1954). This Court will consider the statutes context; its language, subject matter, and historical background; its effects and consequences; and its spirit and purpose. Hayes v. Contl Ins. Co., 178 Ariz. 264, 268, 872 P.2d 668, 672 (1994). 14 The history of section 33-420 shows that the legislature meant it to The legislative discussion consistently

apply to documents that create liens.

referred only to documents that purport to create liens. See supra 7. Later discussions about possible amendments to section 33-420 confirmed the narrower 7

scope of section 33-420 by referring only to liens. See, e.g., State of Arizona, 37th Legislature, Minutes of Committee on Judiciary, S.B. 1071 (Mar. 12, 1985) (discussing possible increase to penalties for filing liens against property); State of Arizona, 40th Legislature, Minutes of Committee on Commerce and Labor, H.B. 2356 (Apr. 15, 1992) (explaining that an amendment would eliminate the requirement that a suit to clear title of a false lien be filed against the county recorder). 15 This Court reads the subsections of section 33-420 together so that

they are interpreted consistently. See Wyatt, 167 Ariz. at 285, 806 P.2d at 874. Subsections A, C, and E of section 33-420 create the liability the statute imposes. Subsection B is most relevant to this case because it creates a private right of action for the liability detailed in subsections A and C. Subsection B empowers an owner or beneficial title holder to bring a special action to clear title on the ground that the lien is forged, groundless, contains a material misstatement or false claim or is otherwise invalid. (Emphasis added.) The third sentence of

subsection B specifies that a special action can be brought for damages as described in this section along with the special action to clear title. The

damages to which this sentence refers are the damages authorized by subsections A and C. Read together, section 33-420 creates a private right of action only when it

is alleged that a lien is groundless or invalid. It creates no right of action for other recorded documents. 16 The Decision incorrectly read the statute to encompass documents that

dont create liens, incongruously making claim[ing] an interest different and wholly separate from claim[ing] a lien or encumbrance. It did so illogically by ignoring the fact that Arizona courts and the legislature use the terms interest, encumbrance, and lien interchangeably in and construing Title 33. See, e.g., Scottsdale Meml Health Sys., Inc. v. Clark, 157 Ariz. 461, 467, 759 P.2d 607, 613 (1988) (Clarks lien continued, of course, and was unaffected by the trustee sale because it was a senior encumbrance.); A.R.S. 33-705 (A mortgage or deed of trust that is given as a security for a loan made to purchase the real property that is encumbered by the mortgage or deed of trust has priority over all other liens and encumbrances that are incurred against the purchaser before acquiring title to the real property.) (emphasis added). 17 Listing synonymous terms as the Legislature did with lien,

encumbrance, and interest in A.R.S. 33-420(A) doesnt mean the Legislature meant three different things. Legislatures often use synonyms for emphasis, to make a statutes application unmistakable. See McNally v. United States, 483 U.S. 350, 359 (1987). Phrases connected by or are not necessarily disjunctive. See id. Consistently, canons of statutory construction dictate that 9

terms connected by or should not be construed separately when the context dictates otherwise. Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979). 18 Here, interest, lien and encumbrance are synonymous. The

statutes purpose was to facilitate the speedy release of groundless liens that clouded title. The Legislature referred only to liens in enacting the statute, and does not contain a discussion suggesting distinct meanings for encumbrance or interest. Also, Arizona law uses the terms interchangeably. In this context, the Legislature must have listed all three to ensure that the statute provides relief for all groundless liens, however described. Prying these synonyms apart by using the Merriam-Websters Collegiate Dictionary to parse lien narrowly, the Decision misses the history and meaning of A.R.S. 33-420 badly. See Cabell v. Markham, 148 F.2d 737, 739 (2d Cir. 1945) (L. Hand, J.) ([I]t is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary, but to remember that statutes always have some purpose to accomplish), affd, 326 U.S. 404 (1945). 19 In sum, the Decision errs because the Notices are not documents that

create liens. None of the Notices created a lien on the Property. It was the Deed of Trust that created the lien the validity and enforceability of which is not at issue. The Notices were simply procedural and administrative documents incidental to

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the Deed of Trust. Unlike documents that create liens, they did not further cloud title to the Property. B. 20 Even if A.R.S. 33-420 Applies More Broadly, It Applies Only to Documents Creating New Clouds Upon Title. Even if the statute is construed to apply to documents beyond those

creating liens, the statute can only encompass documents announcing a new cloud upon a title. Courts apply section 33-420 to a lis pendens. See Wyatt, 167 Ariz. at 283-85, 806 P.2d at 872-74. Before its application, . . . a groundless lis pendens

could be filed with impunity . . . . Richey, 140 Ariz. at 601, 684 P.2d at 173. Courts closed this loophole, allowing those wronged by a groundless lis pendens to take quick action to clear their title. 21 Application to a lis pendens is distinguishable from this case,

however, because a lis pendens announces a cloud upon title. Brandt v. Scribner, 13 Ariz. 169, 175, 108 P. 491, 493 (1910). The Notices do not announce a cloud upon the title as a lis pendens would. Any cloud on the title already existed as a result of the Deed of Trust. 22 Further, unlike the Recorded Notices in this case, a lis pendens is not

a creature of statute. A lis pendens is a judicial creation. See Brandt, 13 Ariz. at 175, 108 P. at 493. Applying section 33-420 to a lis pendens does not interfere with the Deed of Trust Act. That Act already sets out the requirements executing and challenging notices. See A.R.S. 33-804 (requirements for notices of 11

substitution); 33-808 (requirements for notices of sale); 33-817 (provision regarding assignments); 33-818 (requirements for notices of assignment). The

Decisions treatment of section 33-420 creates a novel, additional method of challenging the Notices and effectively amends the Deed of Trust Act. 23 One Arizona court has also applied section 33-420 to a recorded

Reservation of Rights. See State v. Mabery Ranch, Co., L.L.C., 216 Ariz. 233, 236-37, 165 P.3d 211, 214-15 (App. 2007). This Reservation of Rights was the first recorded document whereby the defendant State Parks intended to establish a replacement easement. Id. Like a Deed of Trust or lis pendens, it was the first document recorded that announced a new cloud upon title. 24 The Notices here did not announce a new cloud upon the title and are

not akin to either a lis pendens or the Reservation of Rights in Mabery Ranch. Even if section 33-420 were to apply to documents other than those that create liens, the context of the statute and case law demonstrate that it could only apply to documents announcing new clouds upon title. Applying section 33-420 to the Notices is unsound policy that would interfere with the balanc[ing of] the concerns of trustors, trustees, and beneficiaries in the Deed of Trust Act. See Hogan, 230 Ariz. at 587, 277 P.3d at 784.

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II. 25

THE APPELLEES LACK STANDING TO SUE UNDER A.R.S. 33420 FOR ERRORS IN THE NOTICES. The Decision incorrectly holds that the Stauffers have standing. To

have standing, a plaintiff must allege a distinct and palpable injury. See Sears v. Hull, 192 Ariz. 65, 69, 961 P.2d 1013, 1017 (1998). Critically, the alleged injury must have been caused by the complained-of conduct. See Strawberry Water Co. v. Paulsen, 220 Ariz. 401, 406, 207 P.3d 654, 659 (App. 2008). 26 The Stauffers have no such injury. Their only injury is their own

default, not any error in the Notices. On appeal, the Stauffers did not dispute the validity of the Deed of Trust or their own default. They claim that, but for one

common error in the Notices, the trustees sale would not have been noticed and they would not have faced a foreclosure sale or damage to their credit. This is wrong. Their default, not any alleged error in the documents, caused the notice of sale to be filed. Regardless of whom the named beneficiaries or trustees were, the right to foreclose existed. Any alleged damage to their credit score was likewise caused by their default, not the Notices. 27 The Stauffers also alleged that error in the Notices may result in

acceleration of other debts the Property secures. They claim in their Complaint that the notice of sale triggered an acceleration clause within a subordinate deed of trust.1 This bootstrap is the same wrong argument made a second time. The
1

R. at 1, Ex. H, 7(d), 10(b). 13

Stauffers failed to point out that this subordinate deed of trust allows for acceleration of the debt if the Stauffers fail to perform their obligations under any other deed of trust or security agreement on the Property which is precisely what happened here. Again, the Stauffers default is the efficient cause of their injury, not the Notices. 28 Just like show me the note plaintiffs, the Stauffers allege

hypothetical harm from a minor recording error irrelevant to their underlying problem: their default. They do not allege that the error caused their default or affected whether they met their obligations under the Deed of Trust. Their liability under the Deed of Trust . . . remained the same no matter who was assigned as beneficiary, or when. See Sitton v. Deutsche Bank Natl Trust, 2013 WL

4766283, *6-*7 (Ariz. App. Sept. 5, 2013). 29 In Sitton, the Court of Appeals construed the materiality requirement

in section 33-420(A). Id. The court held that the plaintiff, complaining of errors in similar notices, could not prevail on her claim because the errors were not material to her. Id. Sitton highlights, albeit indirectly, that such errors are inconsequential to the homeowner. They do not affect whether the homeowner pays the loan or defaults. See id. Even if Ohio Savings Bank had some property interest that was called into question by errors in the Notices, this did not injure the Stauffers. The Stauffers failure to pay caused their default. The Notices didnt make it worse. 14

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Lacking injury, the Stauffers have no standing to sue under section

33-420. Fairness compels this result, just as it guided this Courts rejection of the show me the note argument. The Stauffers should not be able to stop the trustees sale because of an alleged error in notices that caused them no harm. They allege no personal stake in a hypothetical dispute about who is the beneficiary and who is the trustee. They should not be allowed to misuse the statute to obtain a windfall through statutory damages or by keeping a house for which they no longer pay. CONCLUSION 31 This Court should review and reverse the Decision, reinstate the

Superior Courts order dismissing the Complaint, and grant Appellant its attorneys fees under ARCAP 21. RESPECTFULLY SUBMITTED this 19th day of September, 2013.

SNELL & WILMER L.L.P. By: /s/Andrew M. Jacobs Barbara J. Dawson Gregory J. Marshall Andrew M. Jacobs Attorneys for Defendants/Appellants US Bank National Association

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CERTIFICATE OF COMPLIANCE Pursuant to Ariz. R. Civ. App. P. 23, I certify that the attached brief X Uses proportionately spaced type of 14 points or more, is double-

spaced using a Times New Roman font, and contains 3500 words; or Uses monospaced type of no more than 10.5 characters per inch and Does not exceed 40 pages (opening and answering briefs) or 20 pages (reply briefs).

September 19, 2013

/s/ Andrew M. Jacobs Andrew M. Jacobs

CERTIFICATE OF SERVICE The undersigned hereby certifies that on this 19th day of September, 2013, I electronically transmitted the Petition for Review using the ECF System for filing to: Clerk of the Court ARIZONA COURT OF APPEALS 400 West Congress Street Tucson, AZ 85701 The undersigned further certifies that on this 19th day of September, 2013, two copies of the foregoing Petition for Review were sent via U.S. mail, postage pre-paid, addressed to the following:

/s/ Andrew M. Jacobs Andrew M. Jacobs

17936914.3